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The recent crisis has spurred the use of stress tests as a (crisis) management and early warning tool. However, a weakness is that they omit potential risks embedded in the banking groups' geographical structures by assuming that capital and liquidity are available wherever they are needed within the group. This assumption neglects the fact that regulations differ across countries (e.g., minimum capital requirements), and, more importantly, that home/host regulators might limit flows of capital or liquidity within a group during periods of stress. This study presents a framework on how to integrate this risk element into stress tests, and provides illustrative calculations on the size of the potential adjustments needed in the presence of some limits on intragroup flows for banks included in the June 2011 EBA stress tests.

We assess the impact of bank deregulation on the distribution of income in the United States. From the 1970s through the 1990s, most states removed restrictions on intrastate branching, which intensified bank competition and improved bank performance. Exploiting the cross-state, cross-time variation in the timing of branch deregulation, we find that deregulation materially tightened the distribution of income by boosting incomes in the lower part of the income distribution while having little impact on incomes above the median. Bank deregulation tightened the distribution of income by increasing the relative wage rates and working hours of unskilled workers.

Globalization of banking raises questions about banks' liquidity management, their response to liquidity shocks, and the potential for international shock propagation. We conjecture that global banks manage liquidity on a global scale, actively using cross-border internal funding in response to local shocks. Having global operations insulates banks from changes in monetary policy, while banks without global operations are more affected by monetary policy than previously found. We provide direct evidence that internal capital markets are active in global banks and contribute to the international propagation of shocks. This feature was at play during the financial crisis of 2007—2009.

Although the modern theory of financial intermediation portrays liquidity creation as an essential role of banks, comprehensive measures of bank liquidity creation do not exist. We construct four measures and apply them to data on virtually all U. S. banks from 1993 to 2003. We find that bank liquidity creation increased every year and exceeded $2.8 trillion in 2003. Large banks, multibank holding company members, retail banks, and recently merged banks created the most liquidity. Bank liquidity creation is positively correlated with bank value. Testing recent theories of the relationship between capital and liquidity creation, we find that the relationship is positive for large banks and negative for small banks.

We use unique depositor-level data for a bank that faced a run to understand the factors that affect depositor behavior. We find uninsured depositors are most likely to run. Deposit insurance helps, but is only partially effective. Bank-depositor relationships mitigate runs, suggesting that relationship with depositors help banks reduce fragility. In addition, we also find that social networks matter. Finally, we find long-term effects of a solvent bank run in that depositors who run do not return back to the bank. Our results help understand the underlying dynamics of bank runs and hold important policy implications.

This report is a self-evaluation of the Operations Evaluation Department's (OED) Country Assistance Evaluations (CAEs). CAEs examine World Bank performance in a particular country, usually over the past four to five years, and report on its conformity with the relevant Bank Country Assistance Strategy (CAS) and on the overall effectiveness of the specific CAS. This Retrospective addresses the question \"What Have We Learned?\" by compiling lessons relevant for developing country assistance strategies from the most recent batch of CAEs. Second, it assesses revisions to the CAE process, methodology, and presentation to answer the question \"How Can the CAE Instrument Be Improved?\".

Is there any need to clean up a banking system by closing some banks and forcing others to sell assets if the risk of a crisis becomes high? Impaired banks that may be forced to sell illiquid assets in the future have private incentives to hold, rather than sell, those assets Anticipating a potential fire sale, liquid buyers expect high returns, reducing their incentive to lend. Privately optimal trading decisions therefore lead to a worse fire sale and a larger drop in lending than is necessary. We discuss alternative ways of cleaning up the system and the associated costs and benefits.

Using a unique dataset of the Euro-area and the U.S. bank lending standards, we find that low (monetary policy) short-term interest rates soften standards for household and corporate loans. This softening—especially for mortgages—is amplified by securitization activity, weak supervision for bank capital, and low monetary policy rates for an extended period. Conversely, low long-term interest rates do not soften lending standards. Finally, countries with softer lending standards before the crisis related to negative Taylor rule residuals experienced a worse economic performance afterward. These results help shed light on the origins of the crisis and have important policy implications.

What is the effect of financial crises and their resolution on banks' choice of liquidity? When banks have relative expertise in employing risky assets, the market for these assets clears only at fire-sale prices following a large number of bank failures. The gains from acquiring assets at fire-sale prices make it attractive for banks to hold liquid assets. The resulting choice of bank liquidity is countercyclical, inefficiently low during economic booms but excessively high during crises. We present evidence consistent with these predictions. While interventions to resolve banking crises may be desirable ex post, they affect bank liquidity in subtle ways: Liquidity support to failed banks or unconditional support to surviving banks reduces incentives to hold liquidity, whereas support to surviving banks conditional on their liquid asset holdings has the opposite effect.

We study the online market for peer-to-peer (P2P) lending, in which individuals bid on unsecured microloans sought by other individual borrowers. Using a large sample of consummated and failed listings from the largest online P2P lending marketplace, Prosper.com, we find that the online friendships of borrowers act as signals of credit quality. Friendships increase the probability of successful funding, lower interest rates on funded loans, and are associated with lower ex post default rates. The economic effects of friendships show a striking gradation based on the roles and identities of the friends. We discuss the implications of our findings for the disintermediation of financial markets and the design of decentralized electronic markets. This paper was accepted by Sandra Slaughter, information systems.